Subsequent Events

9 Months Ended

Oct. 01, 2011

(9) Subsequent Events

On October 3, 2011, the Company entered into an Agreement and Plan of Merger with Nicole Crafts LLC, a Delaware limited liability company (“Nicole Crafts”), and Sbar’s Acquisition Corporation, a Pennsylvania corporation and wholly-owned subsidiary of Nicole Crafts (“Sbar’s Acquisition Corp.”). Nicole Crafts and Sbar’s Acquisition Corp. are affiliates of Sbar’s, Inc., a vendor of the Company (“Sbar’s”). The Merger Agreement was unanimously approved by A.C. Moore’s Board of Directors, upon the unanimous recommendation of a Special Committee of the Board, which was comprised solely of non-employee independent directors. The parties amended the merger agreement as of October 17, 2011 (such amendment, together with the Agreement and Plan of Merger dated October 3, 2011, the “Merger Agreement”).

The Offer and the Merger

Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof:

	•		Sbar’s Acquisition Corp. was required to commence a tender offer (the “Offer”) no later than October 18, 2011 to acquire all of the outstanding shares of common stock, no par value, of the Company (“Company Common Stock”) at a purchase price of $1.60 per share net to the holders thereof in cash, without interest (the “Offer Price”), subject to applicable withholding taxes; and

	•		as soon as practicable after the consummation of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Sbar’s Acquisition Corp. will merge with and into the Company (the “Merger” and, together with the Offer, the “Transactions”) with the Company continuing as the surviving corporation and a direct wholly-owned subsidiary of Nicole Crafts.

The Merger Agreement also provides that the Merger may be consummated regardless of whether the Offer is completed, but if the Offer is not completed, the Merger will only be able to be consummated after the shareholders of the Company have adopted the Merger Agreement at a meeting of shareholders. Sbar’s Acquisition Corp. commenced the tender offer on October 18, 2011.

In the Merger, each outstanding share of the Company’s common stock, other than shares held by Nicole Crafts or Sbar’s Acquisition Corp. or by shareholders who have validly exercised their dissenters rights (to the extent available under Pennsylvania law), will be converted into the right to receive cash in an amount equal to the Offer Price.

Top-Up Option

If, following completion of the Offer, Sbar’s Acquisition Corp. owns at least 80% of the then outstanding shares of Company Common Stock on a Fully-Diluted Basis (assuming the issuance of the Top-Up Option shares as described below), the parties have agreed to take all necessary and appropriate action to complete the Merger without a meeting of Company shareholders pursuant to the “short form” merger procedures available under Pennsylvania law. The Company has also granted to Sbar’s Acquisition Corp. an irrevocable option (the “Top-Up Option”), which Sbar’s Acquisition Corp. may exercise on or prior to the second Business Day after the acceptance for payment of shares of Company Common Stock tendered in the Offer, if necessary, to purchase from the Company the number of shares of Common Stock that, when added to the shares of Company Common Stock already owned by Nicole Crafts or any of its subsidiaries following consummation of the Offer, constitutes one share of Company Common Stock more than 80% of the shares of Common Stock then outstanding on a Fully-Diluted Basis (assuming the issuance of the Top-Up Option shares). In the event that Sbar’s Acquisition Corp. does not hold at least 80% of the outstanding shares of Company Common Stock following the consummation of the Offer, including through exercise of the Top-Up Option, the Company must obtain the approval of the Company’s shareholders to consummate the Merger. In this event, the Company will call and convene a shareholder meeting to obtain this approval, and Nicole Crafts and Sbar’s Acquisition Corp. will vote all shares of Company Common Stock acquired by them pursuant to the Offer in favor of the adoption of the Merger Agreement and the consummation of the Merger, thereby assuring approval of the Merger.

Offer Conditions and Merger Conditions

The obligation of Sbar’s Acquisition Corp. to accept for payment and pay for all shares of Company Common Stock tendered in the Offer is subject to the satisfaction of a number of conditions set forth in the Merger Agreement, including: (i) at least 70.7% of the shares of Company Common Stock then outstanding, on a Fully-Diluted Basis, having been validly tendered in (and not withdrawn from) the Offer (the “Minimum Tender Condition”), (ii) the receipt of financing, in an amount sufficient to consummate the Offer and the Merger, by Nicole Crafts or Sbar’s Acquisition Corp. or confirmation from the lenders that such financing will be available at Closing, (iii) the absence of a Material Adverse Effect on the Company and its subsidiaries, and (iv) other customary conditions. Except for the Minimum Tender Condition, the foregoing conditions may be waived by Nicole Crafts or Sbar’s Acquisition Corp. In the event that the Minimum Tender Condition is not met, and in certain other circumstances, the parties have agreed to complete the Merger without the prior completion of the Offer, after receipt of the affirmative vote of a majority of the votes cast by all holders of Company Common Stock entitled to vote on the adoption of the Merger Agreement. The consummation of the Merger would be subject to similar conditions as the Offer conditions, other than the addition of the shareholder approval requirement, if the Offer Closing does not occur, and the inapplicability of the Minimum Tender Condition.

Financing of Nicole Crafts and Sbar’s Acquisition Corp.

Nicole Crafts and Sbar’s Acquisition Corp. represented in the Merger Agreement that they will have available sufficient funds (including the amounts deposited in escrow pursuant to the Deposit Escrow Agreement (as defined below)) and a commitment from Wells Fargo Bank, National Association, or one or more comparable financial institutions (the “Wells Fargo Commitment”) to enable them to have sufficient funds (the “Financing”) to permit Sbar’s Acquisition Corp. to perform all of its obligations under the Merger Agreement. Nicole Crafts and Sbar’s Acquisition Corp. agreed to use commercially reasonable efforts to obtain the Financing on the terms and conditions described in the Wells Fargo Commitment. If any portion of the Financing becomes unavailable on the terms and conditions contemplated by the Wells Fargo Commitment, Nicole Crafts and Sbar’s Acquisition Corp. agreed to use commercially reasonable efforts to arrange and obtain alternative financing from alternative sources in an amount sufficient to consummate the transactions contemplated by the Merger Agreement. Wells Fargo Bank, National Association, also serves as the Deposit Escrow Agent (as defined below) under the Deposit Escrow Agreement described below. Wells Fargo Retail Finance, LLC is the Company’s senior secured lender.

Representations and Warranties; Covenants

The Merger Agreement includes customary representations, warranties and covenants of the Company, Nicole Crafts and Sbar’s Acquisition Corp. Under the terms of the Merger Agreement, the Company has also agreed to certain covenants prohibiting the Company from soliciting, or providing information or entering into discussions concerning proposals relating to alternative business combination transactions, except in limited circumstances relating to unsolicited proposals that are, or may reasonably be expected to become, a Superior Proposal.

Termination

The Merger Agreement includes customary termination provisions for both the Company and Nicole Crafts, including, among others, by either party if the Merger is not consummated on or before December 30, 2011. The Company may also terminate the Merger Agreement in order to accept a Superior Proposal. In connection with the termination of the Merger Agreement under specified circumstances, the Company will be required to pay Nicole Crafts a termination fee of $2.0 million.

Amendment to the Merger Agreement

On October 17, 2011, the Company entered into Amendment No. 1 to the Merger Agreement (“Amendment No. 1”) with Nicole Crafts and Sbar’s Acquisition Corp.

The Merger Agreement initially provided Nicole Crafts with the right to designate directors to the Company Board in certain circumstances. Pursuant to Amendment No. 1, the parties agreed to, among other things, eliminate such right, and Amendment No. 1 provides that the Company has no obligation to enable any designee of Nicole Crafts to be elected and/or designated to the Company Board.

The Merger Agreement also provides for certain covenants applicable to the Company relating to the ordinary conduct of its business. The Merger Agreement initially provided that such covenants were to apply until the earlier of the Effective Time and the time that Nicole Crafts’ designees to the Company Board constitute at least a majority of the Company Board (the “Covenant Period”). Pursuant to Amendment No. 1, the parties agreed to modify the Covenant Period to be the earlier of the Effective Time of the Merger and three business days after the Offer Closing.

In addition, the Merger Agreement initially provided that (i) the Company would use commercially reasonable efforts to cause the Company Board to have at least three Continuing Directors in the event that Nicole Crafts’ designees are elected or designated to the Company Board until the Effective Time (the “Continuing Director Period”) and (ii) that the affirmative vote of a majority of Continuing Directors was required to take certain actions from the time that Parent’s designees are elected or designated to the Company Board until the Effective Time (the “Continuing Director Approval Period”). Pursuant to Amendment No. 1, the parties agreed (i) to modify the Continuing Director Period and the Continuing Director Approval Period to be from the date of the Offer Closing until the Effective Time and (ii) that the obligation to cause the Continuing Directors to be on the Company Board shall be Nicole Crafts’ obligation.

Deposit Escrow Agreement

Nicole Crafts and Sbar’s Acquisition Corp. are newly-formed entities that were formed for the purpose of entering into the Merger Agreement with the Company and acquiring the Company. As such, in order to provide some security for the obligations of Nicole Crafts and Sbar’s Acquisition Corp. to consummate the Transactions, concurrently with the execution of the Merger Agreement, a Deposit Escrow Agreement (the “Deposit Escrow Agreement”) was entered into by and among Nicole Crafts, Sbar’s Acquisition Corp., the Company and Wells Fargo Bank, National Association, as deposit escrow agent (the “Deposit Escrow Agent”). Pursuant to the terms of the Deposit Escrow Agreement, Sbar’s Acquisition Corp. has deposited $20 million (the “Escrow Amount”) into an escrow account.

Pursuant to the Deposit Escrow Agreement, if the Closing does not occur on or prior to December 30, 2011, and all conditions to the obligations of Nicole Crafts and Sbar’s Acquisition Corp. to consummate the Merger have been satisfied or waived, or all conditions to the obligations of the Company to consummate the Merger have not been satisfied or waived, then, subject to the Final Determination, as defined in the Deposit Escrow Agreement, the Escrow Amount will be distributed to the Company. However, if the Merger is not consummated by December 30, 2011, and all conditions to the obligations of Nicole Crafts and Sbar’s Acquisition Corp. to consummate the Merger have not been satisfied or waived and all conditions to the obligations of the Company to consummate the Merger have been satisfied or waived, then, subject to the Final Determination, the Escrow Amount will be returned to Sbar’s Acquisition Corp.

Limited Guaranty

The Merger Agreement provides for customary indemnification by the Surviving Corporation in favor of the Indemnified Parties as described in the Merger Agreement. Sbar’s agreed to guarantee such indemnification obligations, subject to certain limitations, pursuant to the Limited Guaranty, dated as of October 3, 2011 (the “Guaranty”), made and delivered by Sbar’s to the Company, in favor of, and for the benefit of, the Guaranteed Parties (as defined in the Guaranty).

The Merger Agreement contains customary representations and warranties the Company, Nicole Crafts and Sbar’s Acquisition Corp. made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contracts among the Company, Nicole Crafts and Sbar’s Acquisition Corp. and may be subject to important qualifications and limitations agreed to by the Company, Nicole Crafts and Sbar’s Acquisition Corp. in connection with the negotiated terms, including, but not limited to, information in confidential disclosure schedules provided by the Company in connection with the signing of the Merger Agreement. These disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Merger Agreement. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to shareholders or may have been used for purposes of allocating risk among the Company, Nicole Crafts and Sbar’s Acquisition Corp. rather than establishing matters as facts. The Company’s shareholders and other investors are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of the Company, Nicole Crafts, Sbar’s Acquisition Corp. or any of their respective subsidiaries or affiliates.

Further details with respect to the Merger Agreement can be found in other filings with the U.S. Securities and Exchange Commission made by the Company, including, but not limited to, the Solicitation / Recommendation Statement on Schedule 14D-9 filed by the Company with the SEC on October 18, 2011 and any amendments to the Schedule 14D-9. Capitalized terms which are used in this Form 10-Q but not defined have the meanings ascribed to them in the Merger Agreement, Deposit Escrow Agreement or Guaranty.

Shareholder Demand and Litigation related to the Offer and the Merger

Subsequent to A.C. Moore’s announcement of the Merger Agreement, the board of directors of A.C. Moore (the “Board”) received a demand letter and three lawsuits have been commenced in connection with the transactions contemplated by the Merger Agreement.

Demand Letter

On October 6, 2011, the Board received a letter (the “Demand Letter”) from David Raul (“Raul”), a purported shareholder of A.C. Moore. Raul alleged that the members of the Board had breached their fiduciary duties to A.C. Moore and its shareholders in connection with the Transactions. Raul demanded that the Board remedy the foregoing breaches of fiduciary duties. On October 12, 2011, the Board appointed a special committee to consider the allegations set forth in the demand letter. On October 26, 2011, Raul filed a putative class and derivative action lawsuit as more fully described below.

Shareholder Lawsuits

On October 11, 2011, a putative class action lawsuit captioned Provoncha v. A.C. Moore Arts & Crafts, Inc., et al., Docket No. C 147-11, was filed in the Superior Court of New Jersey, Chancery Division, Camden County (the “Provoncha Action”). On October 26, 2011, Raul filed a putative class action and shareholder derivative lawsuit captioned Raul v. Joyce, et. al., Case ID 111003505, in the Court of Common Pleas of Philadelphia County (the “Raul Action”). On October 31, 2011, a putative shareholder derivative lawsuit captioned Heffernan v. Joyce, et al., Docket Number C 157-11, was filed in the Superior Court of New Jersey, Chancery Division, Camden County (the “Heffernan Action” and, together with the Provoncha Action and the Raul Action, the “Actions”). The complaints for the Actions name as defendants the members of the Board, Parent and Merger Sub. The Provoncha Action also names A.C. Moore as a defendant and the Raul and Heffernan Actions name A.C. Moore as a nominal defendant, as these claims were brought derivatively on behalf of A.C. Moore.

The complaints for the Actions generally allege, among other things, claims for breaches of fiduciary duties against the Board in connection with the Transactions and that Parent and Merger Sub aided and abetted the purported breaches of fiduciary duties. The complaints also allege that the Solicitation/Recommendation Statement on Schedule 14D-9, as amended (the “Schedule 14D-9”), filed by A.C. Moore with the SEC in connection with the Offer contains materially misleading statements and/or omits material information. The complaints generally seek, among other things, injunctive relief, including enjoining the Board, and anyone acting in concert with them, from proceeding with the transactions contemplated by the Merger Agreement and an award of attorneys’ fees and other fees and costs, in addition to other relief. A.C. Moore believes the plaintiffs’ allegations lack merit.

Memorandum of Understanding

On November 3, 2011, solely to avoid the costs, disruption, and distraction of further litigation and without admitting the validity of any allegations made in the Demand Letter or the Actions, or any liability with respect thereto or that any further supplemental disclosure is required under any applicable rule, statute, regulation or law, the parties to the Actions and the Demand Letter signed a memorandum of understanding (the “MOU”) regarding a proposed settlement of the Actions and the Demand Letter. In connection with the MOU, A.C. Moore has agreed to amend the Schedule 14D-9 to include certain supplemental disclosures (the “Supplemental Disclosures”), which A.C. Moore has included in an amendment to the Schedule 14D-9 filed on November 4, 2011 and are set forth in the Item 8.01 Form 8-K filed by A.C. Moore on November 4, 2011. The proposed settlement is contingent upon, among other items, the execution of a formal stipulation of settlement, confirmatory discovery by the plaintiffs, court approval of the settlement in the Court of Common Pleas of Philadelphia County and consummation of the transactions as set forth in the Merger Agreement. Subject to satisfaction of the conditions set forth in the MOU, the stipulation of settlement will provide that, among other things, the defendants will be released by the plaintiffs, and all members of any relevant class of A.C. Moore shareholders, from all claims arising out of the transactions, the Actions and the Demand Letter, upon which occurrence the plaintiffs in the New Jersey Actions will take all necessary steps to terminate those Actions with prejudice. The MOU further provides that A.C. Moore, its successor and/or its insurer will pay to the plaintiffs’ counsel an amount not more than $250,000 as is approved by court order, in the aggregate, for their services and disbursements in the Actions and the Demand Letter. In the event the settlement is not approved or such conditions are not satisfied, A.C. Moore intends to continue to contest the Actions and the Demand Letter vigorously; however, there can be no assurance that A.C. Moore will be successful in its defense.